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5 Deathbed Stocks

Are these companies dead -- or just dead-ish?

We've all heard of the "death rattle," the last gasp from a lost soul's lungs. Sometimes, we seem to hear it from the companies in which we invest. Revenue dries up. Margins contract. Profits evaporate. All these signs suggest that their condition is worsening -- a financial death rattle, if you will.

Stocks in sick bayDon't assume that all such companies are goners. Some will barely cling to life. Others will make a full recovery. But here, we're seeking companies that have all but given up the ghost.

For help, we'll turn to the clever coroners at our 125,000-strong Motley Fool CAPS community, where members give the thumbs-up or thumbs-down to some 5,400 stocks. We've unearthed a handful of stocks that look like they might be headed six feet under, based on the rock-bottom one-star ratings they've garnered.

Then we'll palpate their pulse with some quick tests for liquidity. Who knows? Maybe we'll still find some signs of life! The current ratio and quick ratio (also called the "acid test" ratio) give us an idea of a company's ability to pay its bills, while the Altman Z-Score suggests companies in danger of bankruptcy. Companies scoring 3.00 and above are considered safe, between 2.70 and 2.99 are "yellow flags," between 1.80 and 2.70 have a good chance of going bankrupt within two years, and those with scores below 1.80 mean the cryptkeeper is waiting.

Here's today's list. The question is, are these companies only mostly dead, or have they already given up the ghost?

We obviously don't know if these companies are headed six feet under, so don't short them based on their appearance here. Also, bear in mind that some companies, like software makers and financials, don't neatly fit into the Altman Z-Score scale. Nonetheless, these stocks' one-star status means they may be destined to seriously underperform the market. At least one of the stocks we've highlighted here in the past -- cable TV operator Charter Communications, which first appeared here back last June -- subsequently filed for bankruptcy protection.

A dying wishDespite Life Partner Holdings' appearance on our list, should we cite Mad Money star Jim Cramer as a contrary indicator? When he recently panned the viatical business leader because of a weak stock chart, high short interest, and apparent legal troubles, perhaps his condemnation actually signalled that Life Partners was ready to move.

Viatical settlements generally allow the terminally ill to sell their life insurance policies for living expenses. Life settlements, the niche in which Life Partners operates, focuses instead on seniors "who are not terminally ill but have a life expectancy between two and roughly 10 years." They get a lump sum settlement (based on certain factors) that often exceeds what they would get if they canceled the policy before it matured, or before they died.

With a macabre-sounding business -- after all, it's almost like wishing for a speedy death -- it seems to match at least one investing tenet of Peter Lynch: It makes you go "eeewww!" And the analysts at Conning Research have noted that the life settlement business is now a $12 billion industry, tripling its size in just three years. With the economy in a tailspin and credit hard to come by, people might increasingly turn to cash-rich life insurance policies for liquidity, pushing the industry even higher.

Life Partners has come under legal scrutiny, but in a recent settlement in Colorado, the state commissioner acknowledged there was no allegation or assertion of "any impropriety against LPI." Top-rated CAPS All-Star BenGriffin71 thinks the market has overreacted to negative media portrayals, and he believes the business is sound:

At this point bears have taken [Life Partners] down to the mid 15's the value is amazing considering this is a company that is growing both revenues and profits, does not rely on credit and deals with a growing market in an investment that is non correlated with other major investment types. Free cash flow positive by a substantial margin Pays a very safe dividend

Rattling the cageAre these companies doomed to drag their investors into an underworld of underperformance? Or will they be resurrected to stalk the markets once again? It pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page. Sign up today, absolutely free, and let us know whether you think the Grim Reaper's at the door.

Author

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.